Saturday, November 4, 2017

Approaching Singularity

The story this week is much the same as last week. The buy spikes in the VXX $ Volume Indicator and the ETF SQQQ/TQQQ remain in force with last weeks action resulting in only minor pullbacks in those indicators. Over the last 7 trading sessions the SPX is up just over 1% while the NDX is up over 4%. One well-respected analyst has a target of about 6700 for the NDX, or about 5% higher, so this may result in a 1-2% increase in the SPX.

I. Sentiment Indicators

This week I'm sticking to the 2015-17 period view with int EMAs to show comparisons to late 2015. The overall Indicator Scoreboard has retreated to the levels of most recent lows, but is well off the lows of -12 at the Nov 2015 SPX highs.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has started to retreat, but again is well short of the late 2015 levels.

The Smart Beta P/C (ETF puts/Equity calls) has now dropped down to the 0.45 level which may be why the SPX has run into a brick wall, but slightly lower levels were seen before the May and Nov 2015 tops. The largest components of the ETF puts are the SPY, QQQ and IWM.

The VXX $ volume indicator has only fallen to neutral and should fall to the 0.6-0.7 level before a top is seen.

Next, I want to look at some of the 3x equity ETFs (SPX, NDX, RUT, and BKX) to see what sectors are likely to outperform for the remainder of the rally. The SPXU/UPRO SPX ETF bearish sentiment has bounced off the lows at 0.6 in mid-Oct, but remains at the lowest levels seen prior to 2017.

The SQQQ/TQQQ NDX bearish sentiment remains well above the mean even after the 4% rally of the last two weeks. It's hard to predict how high the NDX may need to rally to lower sentiment levels, but 5-6% seems reasonable at 6700. With record high consumer sentiment levels, Xmas shopping may provide an extra boost thru the holiday season.

The TZA/TNA RUT ETF bearish sentiment looks like a more volatile version of the SPX ETFs with a bounce only to neutral before turning down, so only limited gains are likely here.

The FAS/FAZ BKX ETF bearish sentiment remains at the lowest levels seen over the last three years, so very limited gains are likely here.

Finally, back to the other sectors. Bonds (TNX) saw a moderate decline in rates from the recent runup, but sentiment remains in an unfavorable position.

The SPY showed more daily volatility than expected, but the overall expectations of a pullback early in the week to 257 followed by a late week rally worked out. Looking at the SPY open int for next week, Wed the "most likely" is at 257.5, but the low int levels give little guidance.

For Fri, "most likely" remains at 257.5 with strong resistance at 259, but a move over 259 is possible which would cause delta hedging.

For exp week, the buildup in put has raised the "most likely" to 257 with delta hedging over 258.

I wanted to look at the QQQs to see if that would provide any targets, but current price levels are already in the delta hedging area, so no guidance for Nov exp.

Dec shows some resistance at 156, but it's too early to see the significance.

Conclusions. Much the same as last week, the high VXX $ volume continues to be a problem as does the continued bearishness for the NDX short term. It's starting to look more like a marathon is required to wear out the remaining bears. It's easy to see why someone would be skeptical of high beta tech stocks when you have AMZN trading at a PE of 280 and NFLX at 200, but this is probably what it looked like the last half of 1999. Current sentiment indicates a possible 5-6% higher for NDX and 1-2% for SPX.